Should I Fix My Mortgage for 1 Year or 2 Years in New Zealand?

What fixing means and why it matters

When you fix your mortgage, you lock in an interest rate for a set period — typically 6 months, 1 year, 18 months, 2 years, 3 years or 5 years in the NZ market. During that period, your rate won't change regardless of what happens to the Official Cash Rate (OCR) or market rates more broadly.

At the end of your fixed term, you're on a "refix" decision: choose a new fixed term, or roll onto floating (the bank's standard variable rate). This decision happens repeatedly over the life of your mortgage, and the cumulative effect of getting it right or wrong is tens of thousands of dollars in interest across a 25–30 year loan.

The 1-year vs 2-year trade-off

The core decision between 1-year and 2-year fixed comes down to two competing considerations:

• Rate level today. If 2-year rates are lower than 1-year rates, you can lock in a lower rate for longer. If 1-year rates are lower, you pay less in the short term but take rate risk at the 12-month mark.
• Your view on where rates are going. If you expect rates to fall over the next year, a 1-year term lets you refix at a lower rate sooner. If you expect rates to stay flat or rise, a 2-year term offers protection.

The challenge is that no one — not economists, not banks, not the RBNZ — can reliably predict the direction of interest rates 12 or 24 months out. The OCR moves with inflation data, global economic conditions, the exchange rate and domestic labour market trends. Anyone who tells you with certainty where rates will be in two years is guessing.

Why the lowest rate isn't always the cheapest option

Here's where people get tripped up. Suppose 1-year rates are 5.49% and 2-year rates are 5.29%. On the surface, the 2-year rate is lower. But that doesn't mean it's the cheaper choice over the next two years.

If rates fall significantly in the next 12 months — say the 1-year rate drops to 4.5% — then fixing for 1 year at 5.49% and refixing at 4.5% next year gives you a blended rate of around 4.99% over two years. That's considerably cheaper than locking in 5.29% for the full two years.

Conversely, if rates rise and the 1-year rate in 12 months is 6.2%, you'd be better off having locked the 2-year at 5.29%.

The Refix Comparison Tool can help you model this directly — enter both options and see the total interest cost over 2 years under different future rate scenarios.

What the term structure of rates tells you

NZ banks price fixed rates based on wholesale swap rates — essentially the market's expectation of where floating rates will average over that period. When the 2-year rate is lower than the 1-year rate, it often signals that the market expects rates to fall over the next two years. When it's the other way around (longer rates higher), it often signals expectations of rates rising or staying elevated.

This is a useful signal, but not a definitive one. Markets get it wrong. It does suggest, however, that when you're choosing between a lower long-term rate and a higher short-term rate, the market is already pricing in some expectation of where things are heading. Choosing the 1-year rate in this environment means you're betting rates will fall faster or further than the market expects.

Your personal circumstances matter as much as the rate

Beyond the rate question, your situation should shape the term choice:

• If you might sell in the next 1–2 years: A shorter term reduces your break fee risk. Breaking a 2-year fixed term to sell can be expensive if rates have fallen since you fixed.
• If you need payment certainty: A longer term gives you a known repayment for longer, which is helpful for budgeting or if your income is variable.
• If you're refinancing or might want to make large lump sum payments: A shorter term gives you more flexibility to restructure without break fees.
• If you're in a mortgage split structure: Your existing fixed portions influence when it makes sense to fix the next tranche and for how long.

The case for splitting across multiple terms

Many NZ homeowners choose to split their mortgage across two or three terms — for example, fixing one third for 1 year, one third for 2 years and one third for 3 years. This laddering approach means you're never fully exposed to a single rate decision at one time. Some portion of the mortgage comes up for refix each year, giving you regular opportunities to respond to market conditions.

It's not the optimal strategy if rates move sharply in one direction, but it's a reasonable hedge for people who don't want to make large bets on rate movements and value predictability.

What about floating?

Floating rates in New Zealand are typically 1.5–2.5% higher than the best fixed rates. That means floating is usually the most expensive option. However, floating gives you complete flexibility: you can make unlimited extra repayments, break at any time without fees, and restructure whenever you want.

Floating tends to make sense if you're expecting to sell soon, if you have large irregular income (bonus, business sale proceeds) you want to use to pay down the mortgage quickly, or if you want maximum flexibility during a period of significant personal change. Otherwise, for most borrowers in most conditions, fixed rates offer a better return on certainty.

The practical approach

For most homeowners, the refix decision comes down to checking current rate offers from your bank (and potentially comparing to what competitors are offering), running the total 2-year interest cost for each option, considering your personal circumstances and likely life changes in the next 1–2 years, and making a decision you can live with — not one that requires rates to move in a specific direction to pay off.

A mortgage adviser can give you a full market view of what's available and model the scenarios for your specific balance. They typically don't charge for this, as they're paid by the lender on settlement.

These calculations are for guidance only and do not constitute financial advice. Interest rate forecasts are inherently uncertain. Always speak with a qualified mortgage adviser before making rate fixing decisions.